FINANCE AND INVESTMENT
By CUSTOS
MARKETS are slowly giving ground, as one feared they must, in face of superior enemy forces. Thanks to the strong technical position—there are no unwieldy over- bought accounts—and to the toughness of investors' morale the retreat is stubborn and there is not the least sign of panic. But the fall in prices is itself the best witness that there is precious little buying. Uncertainties, such as the Government's fresh reinedial measures to safeguard the pound, the nature of the threatened Excess Profits Duty, to say nothing of the possibility of a further turn of the dearer money screw, are now impos- ing powerful restraints. Nor is this all. Although many sections of industry are still basking in the sunshine of sellers' markets, some are beginning to feel• the effects of keener competition and of consumer resist- ance. All businesses face the problems, in varying degree, of falling inventory values, and most have to tackle the question of matching financial resources to current requirements. A plan of readjustment has, in fact, begun and for some companies it is bound to bring difficulties, at least in the short run. Against this background I cannot see how the general level of industrial share prices can avoid a further fall.
Imperial Chemical Surprise
After the recent lull, during which. City issuing houses have been searching for a new investment basis, the sudden revival in the new issue market has taken some sections of the City by surprise. The new financing plans of Imperial Chemical Industries, which aim at raising over £20 million of new money, have been a well-kept secret. Taken in conjunction with the new financing arrangements of Associated Electrical Indus- tries they come as a sharp reminder of the huge capital requirements of many sections of British industry and also of the difficult conditions which now prevail in investment markets. After the dismal failures of recent Debenture flotations those responsible for arranging new financing have been forced back on " rights " issues to Ordinary shareholders. While I think this is a wel- come development from most points of view, it obviously puts a considerable strain on the supplies of risk capital at a time when the economic prospect is not exactly bright and when the supply of new savings is quite subnormal. One cannot wonder, therefore, that the announcement of these large-scale " rights " issues to Ordinary shareholders has proved the signal for a rapid downward adjustment of quotations in the market. In the case of Imperial Chemical Industries, who are making a one-for-six issue of new Ordinary shares at 40s. 6d., the existing £1 Ordinaries have fallen by 2s. to 42s. 9d. The £1 Ordinaries of Associated Electrical Industries, whose issue takes the form of a one-for-three offer of new Ordinaries at 60s., have tumbled by 6s. during the past three weeks to 73s. In both cases the new money is required to finance a rapid expan sion of business, whose requirements cannot be fully met out of surplus earnings with taxation at its present onerous level. notice that the Associated Electrical directors, in disclosing that bank loans at the end of 1951 stood at £2,050,000, add that this indebtedness " must be repa:d." This seems to imply that there is some pressure from the banks for a reduction of accom- modation, which seems just a little surpris- ing in the case of a company of this size, Buying Opportunities As to dividend prospects, the effect of substantial new offers of Ordinary shares is, of course, to reduce the earnings per share _until such time as the additional resources " begin to bear fruit. So far as Associated electrical Industries are concerned, the directors have gone out of their way to emphasise that if earnings continue at their present level, as is confidently expected, the dividend rate will be maintained for 1952 at the 20 per cent. rate to which it was raised from 15 per cent. a year ago, On this basis be the new shares at £3 are being offered at an attractive price, especially as the-20 per cent. dividend rate has latterly been covered by earnings of over 60 per cent. On an ex- rights basis the existing units should stand around 70s. and would therefore be priced to give a yield of not far short of 6 per cent. This is the sort of return which has not been available on a leading equity of this kind for a long time past and I therefore advise investors to await the opportunity to pick up the " rights " in the market when deal- ings begin. Much the same-may be said of Imperial Chemicals, whose 12 per cent. dividend was covered in 1950 by earnings of just under 47 per cent. Here, the ex-rights equivalent of the present market price is around 42s. 6d., so that the indicated yield, assuming, as I think one may, that the dividend will be maintained on the larger capital, is about 51 per cent. Again, my advice to would-be investors is to wait for dealings in the " rights," which may well provide an opportunity for acquiring a stake in our largest industrial enterprise on favourable terms.
Banks and Gilt-edged So far, none of the bank chairmen has disclosed the extent of the provision required to cover last year's 'depreciation on gilt- edged securities. This policy of non- disclosure is not, in my view, surprising, nor do I think that it should come in for criticism from bank shareholders. Under the Com- panies' Act of 1948 the banks were given a special dispensation entitling them to greater secrecy than is available to the general run of industrial concerns, and I see no reason to quarrel with the bank directors' decision to adhere to their traditional practice. What shareholders have wished to know, and are now told,'is that whatever deprecia- tion did arise to be dealt with in the 1951 accounts has been covered out of inner reserves built up over the years for this very purpose. They should also note the point made by Mr. Anthony Tuke in his annual statement to Barclays Bank shareholders that the whole of the fall is bound to be recovered sooner or later, on the assump- tion that the bank holds to maturity the gilt-edged stocks concerned, all of which have definite dates of redemption. Indeed, he goes-so far as to record his satisfaction that the present level of gilt-edged prices is not so " unrealistic " as that which obtained four or five years ago. Harder Money Welcomed As would be expected, the-bank chairmen are not ashamed to declare themselves as wholeheartedly in favour of the recent return to monetary discipline. Mr. Tuke, the Barclays Bank chairman, makes it clear that he regards the use of the dearer money weapon as long overdue. Recalling the Daltonian doses of inflation administered in 1945, he exposes the weaknesses of this policy in 'picturesque terms : " Instead of keeping the stimulant in reserve in case the patient should show signs of collapse they plied him with successive doses of alcohol when he was already slightly intoxicated. Realising, however, that he could not be allowed out and about in that condition they called in the planners to set up. elaborate systems of controls with which to check, thwart and generally infuriate the unfortu- nate victim. And then they gave him another glass- of champagne." In common with the chairman of Martins Bank and of the District, Mr. Tuke distinguishes between a desirable policy of disinflation and what would be a wholly unsuitable policy of drastic deflation. Most emphatic in pursu- ing this distinction is the District Bank chairman, Sir Thomas Barlow, who goes so far as to enjoin on the Chancellor of the Exchequer a policy of caution before taking any irretrievable steps towards altering the balance of our industrial structure. Sir Thomas, who has a life-long experience of Lancashire industry, rightly stresses the importance of the home market in many branches of trade.
Monsanto Chemicals Moving against the trend in the industrial equity market just now are the 5s. Ordinary shares of Monsanto Chemicals. Some of the buying has doubtless been inspired by reports of the enormous potentialities of Krilium, the new " soil conditioner " developed by the Monsanto Chemical Company of St. Louis, which is the parent concern of the English undertaking. Now comes news of the progress of the English company, in which investors here are directly interested, covering the ten months to October 28th, 1951. Trading profits, after providing for depreciation, have jumped from £1,046,867 for the whole of 1950 to £1,724,440. Deducting taxation provision at £989,100, against £597,225, net profit for the ten months comes out at £735,340, against the previous year's net figure of £449,642. These figures do not include for either period the profits off' sub- sidiary companies, but it seems clear enough that this progressive chemical concern is forging rapidly ahead. For 1950 group earnings were over 100 per cent., out of which 55 per cent. was paid in Ordinary dividend, against 45 per cent. for 1949. Subsequently, however, the Ordinary capital has been trebled by the issue of a 200 per cent. scrip bonus, and an interim on account of 1951 has been paid of 61 per cent It seems to me that the final payment is likely to be at least 181 per cent., which would bring up the total to 25 per cent., or the equivalent of 75 perivent. on the capital as it stood before the 200 per cent, bonus. On a 25 per'cent. dividend basis the 5s. shares at 27s. 9d. would be yielding approximately 41 per cent. In these days this is not a high income yield, but this is a " growth " company with great scope for expansion.
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